FRC hits KPMG with £390,000 in fines over ethical breaches

KMPG has been fined hundreds of thousands of pounds by the accountancy watchdog for breaching ethical standards for auditors in two separate cases of misconduct that date back to 2010 and 2011.

The FRC hit the Big Four auditor with fines totalling £390,000, after an investigation found it had placed commercial interests ahead of ethical standards and breached conflict-of-interest rules at two separate clients.

In the first case, the FRC found four instances of misconduct involving KPMG and its chief operating officer James Marsh relating which could have compromised its audit work at telecoms giant Cable and Wireless Worldwide.

The tribunal found that KPMG had continued to audit CWW despite Marsh owning shares in the company. Marsh had failed to sell his shares in CWW when he became a partner at the firm in 2011 and was fined £60,000, reduced to £39,000 to reflect his admission, by the FRC.

The watchdog also discovered misconduct around Marsh’s appointment as COO, when less than two years he had been in a position to “exert significant influence over the financial statements of CWW” and said KPMG lacked “sufficient or appropriate procedures to prevent or identify the failure on the part of Mr Marsh to sell the shares”. It was fined £350,000, which was reduced to £277,500 because of its admission.

Audit client ‘chain of command’

In a separate case, KPMG was fined £250,000 (cut to £162,500) over conflicts of interest when auditors of car dealer Pendragon. The investigation found that KPMG had failed to identify that former partner Mel Egglenton, who was appointed as a non-executive director at Pendragon nine months after leaving the firm, “might have been in the chain of command” and that his appointment would require KPMG’s audit resignation.

KPMG also failed to provide Pendragon’s audit committee with full written disclosure of relationships that bore on its objectivity and independence, the FRC said. It also flagged up that Gregg Watts, KPMG’s audit engagement partner for Pendragon, failed to take all reasonable steps to preserve client confidentiality. KPMG agreed to pay the FRC’s costs in relation to the case.

KPMG said that none of the breaches had a substantive impact on its clients but accepted there were “shortcomings in our procedures around the matters examined by the tribunal and we are disappointed that they occurred”.

“We are pleased that the tribunal agrees that these breaches were unintentional on our part and that they acknowledge the significant efforts we have made (and continue to make) improving our internal processes and controls,” KPMG said.

The outcome against KPMG comes as a welcome victory for the FRC’s tribunal process a week after Deloitte successfully overturned a series of charges laid against it by the FRC over its work at doomed car maker MG Rover.

Paul George welcomed the “constructive approach” adopted by KPMG in acknowledging the seriousness of the charges and in in cooperating with the watchdog, “which has enabled the tribunal to apply reductions to its fines in line with the FRC’s disciplinary scheme.”